Tariffs as Insurance: Optimal Commercial Policy When Domestic Markets Are Incomplete
AbstractFree trade is not optimal for a small country that faces uncertain terms of trade if some factors are immobile - ex post, and markets for contingent claims are incomplete. The government can improve social welfare by using commercial policy that serves as a partial substitute for missing insurance markets. Using a combination of analytical and simulation techniques we demonstrate that optimal policy for this purpose will often have an anti-trade bias. We also show that the usual preference by economists for factor or product taxes and subsidies over tariffs and export subsidies may not be justified in this context.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0797.
Date of creation: Aug 1985
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- Jonathan Eaton & Gene M. Grossman, 1985. "Tariffs as Insurance: Optimal Commercial Policy When Domestic Markets Are Incomplete," Canadian Journal of Economics, Canadian Economics Association, vol. 18(2), pages 258-72, May.
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